I'm an associate editor at Forbes, part of the team responsible for our signature issues: The Forbes 400, Global Billionaires and America's Richest Families. As a writer, I cover these wealthy business builders as well as other entrepreneurs. Before Forbes, I also reported on entrepreneurs for Inc. magazine, and attended Syracuse University's S.I. Newhouse School of Public Communications.

The Argument Against Fiscal Cliff Austerity: Just Look At Britain's Mess

This is what millions of mothers say to their small children for them to down that spoon full of cough syrup. What doctors tell obese patients to talk them into exercise and more broccoli. And it’s the line that many Republicans and conservatives right now are trying to use—to convince us that austerity is the key to solving the fiscal cliff and America’s broader problems, too.

The line works for Mom, but it shouldn’t for Congress. It hasn’t in Britain.

For a clear-headed explanation of why massive spending cuts would likely injure the U.S., not fix it, look no further than Adam Davidson’s New York Times Magazine piece on Adam Posen, a 40-something who, until very recently, was a key British government economist (and the only American to serve in that capacity). Posen would regularly speak out against the U.K.’s massive austerity program—set to last until at least 2018 if Prime Minister David Cameron keeps his job—and the damage it has wrought on the economy.

Brits have something much like our Federal Open Market Committee. It’s the Monetary Policy Committee. Posen served on that nine-member body until earlier this year. Frequently, in his tenure there votes come back as 9-1—Posen as the lone disenter. He was no fan of Cameron axing the government’s budget.

What has British achieved through its austerity? Since Cameron took office in spring 2010, unemployment hasn’t budged much past 7.9%. Consumer confidence declined further. And gross domestic product, the sum of all goods and services, is below the level when Cameron assumed power.

A quite damning case against austerity, you might reckon. And you might think the same thing would happen here in America if we decided to opt for that sort of thing. Because, if you want people to keep buying anything more than basic everyday necessities at Wal-Mart, and want them buying tech gadgets from Apple and Microsoft, and shopping at Kroger‘s and Whole Foods, cutting a much-relied-on lifeline—government spending and assistance—makes little sense. It’s less about whether you like that the government gives hand outs and more about how great the damage would be if that stopped.

If it did, it would sap demand. That’s what Posen found in the U.K. He diagnosed Britain’s ailment as a lack of demand, not a supply problem as British conservatives had argued: Britain, they said, was simply fundamentally less capable. It’s important to understand the contrast between these opposing mindsets:

It was a subtly (but crucially) different way of looking at the problem: the country was not truly less capable. The problem was not one of supply, Posen suggested, but rather of demand. Workers were not less productive than they used to be. They merely needed some help from the government and the central bank—rather than budget cuts—to close the output gap.

America faces a similar demand problem. In the last month alone, consumer sentiment, by at least one measure, experienced the greatest monthly plunge since the height of the financial crisis. Consumer spending, the key driver of the U.S. economy, this year had outpaced business spending. (Corporate America seemed more finely attuned to the eventual showdown in Washington, D.C. By some estimates, some half a trillion in business cash is on the sidelines.) Consumers are now flagging, too.

Now, before you dismiss Posen and his demand-side solution to our problems, understand something. He is not some silly crackpot. He is a highly intelligent, roundish bald man—a Harvard-educated economist whose analysis of Japan helped that country end its Lost Decade in the early 2000s. There, he found that the Japanese central bank needed to print more money, and that the government needed to embrace a spendthrift nature. It worked.

The Times Magazine writer who profiled him, Davidson, minces no words about whether Posen’s Keynesian-driven theorems can find a place in America: “Doing neither stimulus nor austerity—which is basically what’s happening in the United States—isn’t working, either. So, [Posen] says, let’s try stimulus, even if we don’t know for sure it’ll do the job.”

What Posen offers is a different prescription for achieving better health. One that won’t sting as much.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Comments

The economy is _circulatory_ system. It is not closed and therefore not zero-sum, but the circulation is a requirement. When the money collects at the top, it tends to stay there. Despite the Tea party claims to the contrary, real businessmen do not invest in factories and workers and supplies because of their income; they invest because of market factors.

When the money coagulates at the top, the markets stop functioning. That is t_the_ difference between a ‘good’ king/despot and a bad one. The ‘good’ ones invest in their country, paying low-level workers to build roads or statues or monuments or pyramids. The workers spend the money they have and the economy grows.

Rich people cannot spend the money they already have. Poor people -have- to spend whatever money they can get their hands on.

Mike, Lets agree to completely disagree. Those that create wealth for themselves do not save their way to wealth. They spend less than consumed and take it and invest/risk, which is nothing more than spending money on something that has ability to grow rather than consume. Its all spending and a non-stop spending. The wealthy are too wise to let the money sit as you insinuate here. I cordually completely disagree with your thought.

Is the term stimulus anything more than the government redistributing to what it selectively chooses. What difference is stimulus to the economy as to whether the government takes citizens money and redistributes verses not taking their money and letting them spend it. Is lowering taxes not stimulus, which in theory should stimulate the economy as there is more money to spend? Would “not cutting defense” be stimulus as it would be crealting jobs in the industries etc?. Am not insinuating here what would be the best, however as I analyze the use of the term “stimulus”, its appears to really just be a simple matter of who gets to spend it or what form it is distributed.

Spending cuts that don’t materialize? Oh yeah, and what does Washington call a cut? Yep, planning on spending 10% more than last year and instead only spending 7% more. That’s a cut. I am not making this up. Abbott and Costello had some skits that capture this very nicely. The difference is that they were entertaining.

Now for some real math: if the feds reduced spending by about $1 trillion annually it would take us back to funding levels of …. drum roll, please … the George W. Bush administration. I think we can all agree that austerity is certainly not on the table right now.

There are several comments here that indicate austerity might actually help. The IMF has come out recently indicating that the economic multiplier is likely greater that one during an economic downturn, in turn indicating that fiscal stimulus works. The fiscal stimulus may not be sufficient if punches are pulled during implementation, as happened in the U.S. in 2009. That stimulus was too small and several economists said so at the time.

In addition, a hard look at the jurisdictions which attempted expansionary austerity (including Britain, against Posen’s votes) clearly shows that the idea of ‘expansionary austerity’ is a total fiction and fantasy, full stop. The premise that austerity is a good thing in a struggling economy is based on basic conceptual errors on how a national economy with its own currency works.

To see how austerity is seen as a bad thing by even the right wing, you need only look to the panic going on in the U.S. right now over the fiscal cliff, which is actually an austerity package set to automatically go off in the new year…